Here We Go Again
The $14 billion bailout deal to aid the struggling Detroit automakers collapsed Thursday, as Senate Republicans refused to support a bill endorsed by the White House and Congressional Democrats.

It's like déjà vu — for a schizophrenic. In late September, the U.S. House of Representatives wrestled with the first version of the country's $700 billion bailout plan for the financial sector, torpedoing the proposed bill before reversing course and approving a revised version.

Flash forward to last week, with a car bailout up for debate, and it looks something like this:

Initial bank bailout — House no, Senate yes.
Detroit bailout — House yes, Senate no.

A dispute over union wages derailed the compromise between Republicans and Democrats who'd worked feverishly to throw the American automotive industry a lifeline in the form of a government rescue. The sticking point last week, according to Senate Minority Leader Mitch McConnell (R-KY), was whether the United Autoworkers (UAW) union was willing to agree to pay cuts to achieve parity with other manufacturers. GOP senators had demanded that the UAW "agree to steep wage cuts by 2009 to bring their pay into line with Japanese carmakers." The Detroit Free Press reports that according to "people who were in the caucus meeting," UAW negotiators "wanted to hold off on reaching that level of parity until their current contracts with the Detroit automakers expire in 2011," and "Republican members of the Senate apparently decided that was unacceptable."

The Associated Press reports that the current administration is said to have several options: "It could tap the $700 billion financial rescue bailout fund to provide loans to the carmakers or use part of that fund as a kind of collateral for emergency loans the automakers could get from the Federal Reserve. The administration also could do nothing, leaving open the possibility that one or more of the automakers could go bankrupt. But the White House has warned a collapse of the auto industry would severely hurt the economy."

All these efforts — especially in the cases of General Motors Corp. and Chrysler LLC — are geared toward avoiding Chapter 11 filings. There's good reason for automakers to want to avoid bankruptcy filings. "A bankruptcy filing by GM or Chrysler would worsen the longest recession since the early 1980s if it led to a shutdown at the companies," says Bloomberg News. Experts have said that "it would take just days or weeks — no later than the first week of January — for the cascade of plant closures, layoffs and bankruptcies from automakers and suppliers to turn Michigan and its surrounding states into an industrial wasteland, where many in the unemployed populous would need to prepare for foreclosure," as the Detroit Free Press has noted.

On the other hand, the markets are, to a large degree, already treating the auto companies as if they're already in bankruptcy.

Unemployment Reaches 26-Year High
"The number of U.S. workers claiming unemployment benefits reached a 26-year high last week as job losses and hiring freezes gripped the slowing economy," the Financial Times (subscription required) reports, according to data released on Thursday by the U.S. Dept. of Labor.

In the week ending Dec. 6, the advance figure for seasonally adjusted initial claims jumped by 58,000 from the previous week to 573,000. "That number was last exceeded in 1982 when 612,000 made initial claims," the Times reports.

The four-week average, which smooths out fluctuations, was a seasonally adjusted 540,500, the highest since December 1982, when the economy was emerging from a steep recession.

"The rise in unemployment claims exceeded forecasts and suggests that companies are preparing for a long recession," an economist told the Financial Times.

The number of people continuing to claim jobless benefits also jumped much more than expected, increasing by 338,000 to 4.4 million.

U.S. Trade Deficit Grows as Exports Slow
The grim jobs report came as the U.S. trade gap surprisingly widened in October. For the first time in three months, "the trade deficit widened in October ... as exports dropped 2.2 percent, with big declines in sales of American-made products like automobiles and consumer goods," the New York Times reports.

Total October exports of $151.7 billion and imports of $208.9 billion resulted in a goods and services deficit of $57.2 billion, up from $56.6 billion in September, according to the U.S. Dept. of Commerce. October exports were $3.4 billion less than September exports of $155.1 billion. October imports were $2.7 billion less than September imports of $211.6 billion.

"China, one of the larger sources of export demand, has cut back sharply," the International Herald Tribune notes of the Commerce Dept. report. "Domestic demand has slackened, as well; the only increases in imports in October came from crude oil — the price of which fell sharply over the course of the month — and consumer goods."

Bloomberg News reports that "China's industrial production probably grew at the weakest pace in nine years as exports slowed and the economy cooled, raising the likelihood of more interest-rate cuts and extra government spending."

Increasing Cost Pressures for Manufacturers
Anxiety over energy costs has more than doubled since 2007, resulting in an increased commitment to eliminate waste, according to TBM Consulting Group's sixth annual Multinational Manufacturing Pulse.

Conducted in the third quarter of this year, the survey polled 1,406 executives from midsized to large firms in the U.S., U.K., Germany, France, Mexico and Brazil.

"The majority of respondents (53 percent) ranked 'cost pressures' as the biggest hurdle to success in the year ahead," the consulting firm said in a statement. "Nevertheless, 33 percent identified 'rising energy costs' as a source of angst, a dramatic increase from last year's responses at 11 percent."

"Quality issues" and "people issues" continued to be challenges for manufacturers in the countries surveyed.

Outlook for European and UK Manufacturing
Like its counterpart in the U.S., the European manufacturing sector will face serious challenges through 2009, according to the semiannual Manufacturers Alliance/MAPI European Industrial Outlook: 2008-2009.

According to the report, which covers 16 major industries and separately analyzes Western Europe and Central Europe, 12 of the 16 industries in the Eurozone "will likely decline in 2008, with non-metallics falling the most, by 9.8 percent." Moreover, in 2009, "13 industries are forecast to show negative growth, with office machinery and computers forecast to decline by 7.6 percent."

Meanwhile, only seven of 16 industries in Central Europe will decline in 2008, and only one is forecast to decline in 2009. Textiles will decline the most in both years, forecast to fall by 9 percent in 2008 and by 11.9 percent in 2009."

United Kingdom Output Drops
Already, the recession in the UK manufacturing sector "deepened in October, with output dropping a larger-than-expected 1.4 percent on a monthly basis," the Wall Street Journal (subscription required) reports of the Office for National Statistics' findings last week. Manufacturing output has "dropped 4.9 percent, a decline unmatched since June 2002." According to the ONS, 10 of the 13 manufacturing sub-sectors "fell on a month-to-month basis, with transport equipment, which includes auto production, seeing one of the biggest falls. The wider industrial production measure also fell more sharply than expected, dropping 1.7 percent in monthly terms and 5.2 percent on a year-to-year basis."

In addition, German exports "fell slightly in October from September, after a previous monthly rise, data from the Federal Statistics Office showed Tuesday. Total goods exports, adjusted to calendar year and seasonal factors, declined 0.5 percent in October from September to €84.5 billion."

"The UK economy may contract at the fastest pace since 1990 in the current quarter as the recession intensifies," Bloomberg News reports of findings by the National Institute for Economic and Social Research (NIESR). "Gross domestic product fell one percent in the three months through November and will probably plunge more than that in the last three months of the year, the London-based institute, whose clients include the central bank."

According to the NIESR and Bloomberg, "the figures make clear that the rate of output decline is accelerating. ... The problem" that the government "needs to address very urgently is the availability of bank credit; further interest-rate reductions are unlikely to have much effect."

World Bank Predicts Global Economic Recession
According to a forecast released by the World Bank last week, the world economy is on the brink of a rare global recession, with world trade projected to fall next year for the first time since 1982 and capital flows to developing countries predicted to plunge 50 percent.

"The projections are among the most dire in a litany of recent gloomy forecasts for the world economy, and officials at the World Bank warned that if they proved accurate, the downturn could throw many developing countries into crisis and keep tens of millions of people in poverty," the New York Times reports.

The bank forecasts the global economy "will eke out growth of 0.9 percent in 2009, down from 2.5 percent this year and 4 percent in 2006. ... The volume of world trade, which grew 9.8 percent in 2006 and an estimated 6.2 percent this year, will contract by 2.1 percent in 2009."

In a separate report released last week, Deutsche Bank was even more pessimistic, saying "global growth would drop to 0.2 percent in 2009, with the United States, Europe and Japan in recessions of roughly equal severity."

Euro Survives First Decade
In somewhat less depressing news, the euro will celebrate its 10th year in existence next month, "defying doubters as it ends the decade second only to the U.S. dollar in importance and influence after a nascence marked by modest growth and difficult economic adjustments," says MarketWatch.

Some economists say that without the single currency, the current economic crisis would be worse. Absent monetary union, authorities would likely have been dogged by a variety of major currency crises across Europe, according to one analyst.

So, big pieces of cake to the euro.